Dollar weakness has been a feature, concurrent with the U.S. 10-year T-note yield hitting a fresh record low, while sterling and the Canadian dollar have also underperformed. The Australian dollar, meanwhile, managed a bounce from 11-year lows, and the yen and Swiss franc traded mixed, losing ground to an outperforming euro while gaining versus other currencies. European stock indices posted 2%-plus losses, and S&P 500 futures racked up a 1% decline. The COVID-19 virus continued to spread outside of China, with the the number of new cases outside China now exceeding those being reported inside. The U.S. confirmed the first likely case of community transmission and Germany warned that it can no longer trace all cases. Until there is signs that the spread of the coronavirus is retreat, bouts of risk aversion are likely to persist in global markets. The narrow trade-weighted USD index (DXY) printed a two-week low at 98.67, extending the correction from the 34-month peak seen February 20th at 99.91. The dollar also lost ground to the Singapore dollar and Thai baht, among other developing world currencies that have managed to find a foothold after recent sharp losses. USD-JPY dropped to a nine-day low at 109.84, though EUR-JPY, in contrast, lifted towards the four-day high that was seen yesterday. AUD-JPY also rebounded after posting a four-and-a-half-month low during the Tokyo session. EUR-USD rallied to a 17-peak at 1.0948. Cable sank to a one-week low at 1.2860 despite prevailing dollar softness. This came with the UK government signalling an uncompromising stance on trade ahead of the start of negotiations with the EU on Monday. Elsewhere, fresh declines in oil prices lifted USD-CAD to a five-month high at 1.3347.

[EUR, USD]EUR-USD lifted to a fresh two-week high at 1.0948 on the back of dollar softness. The U.S. 10-year T-note yield advantage versus the 10-year Bund yield has narrowed by about 16 bp since last Friday, to 182.8 bp currently (the narrowest since January 2017), which has been concurrent with a rotation higher in EUR-USD from sub-1.0800 levels in what is the pair's most sustained run higher of the year so far. The narrow trade-weighted USD index (DXY) printed a two-week low at 98.67, extending the correction from the 34-month peak seen February 20th at 99.91. We don't anticipate too much upside potential for EUR-USD from here given the headwinds being faced by Europe. A drop in export demand has hit the Germany economy, while Italy ranks as having the second highest number of COVID-19 cases outside China, while Germany warned yesterday that it can no longer trace all cases. International demand for Treasuries, with their deep liquidity and still relatively high yields, is also likely to remain high should risk aversion in markets persist, which should in turn underpin the dollar. Recent data showed a record level of Treasury purchases by Japanese investors. We still anticipate a revisit of EUR-USD's 34-month low at 1.0778, which was seen last Thursday.

[USD, JPY]The yen has been trading somewhat mixed, posting fresh highs versus against a generally softer dollar, pound and Canadian dollar, but either holding steady or declining versus the euro, which has outperformed today, and Australian dollar. The yen appears to have lost its broad safe haven appeal, as this price action was seen as European stock indices posted 2%-plus losses, and S&P 500 futures racked up a 1% decline, portending an ugly open on Wall Street, which is amid is biggest correction in over two years. USD-JPY dropped to a nine-day low at 109.84, though EUR-JPY, in contrast, lifted towards the four-day high that was seen yesterday. AUD-JPY also rebounded after posting a four-and-a-half-month low during the Tokyo session. BoJ's Kataoka said the BoJ must send a message to markets that it will not tolerate price falls, and repeated that the central bank is ready to ease monetary policy further if necessary. Despite this, we anticipate that the yen will remain prone to bouts of safe-haven driven outperformance. The phrase "global pandemic" is being used with more frequency as the COVID-19 virus continues to spread outside of China, with the the number of new cases outside China now exceeding those being reported in China. The U.S. confirmed the first likely case of community transmission (i.e. not involving someone who had been in China) and Germany warned that it can no longer trace all cases. Until there is signs that the spread of the coronavirus is retreat, phases of risk-off positioning are likely to persist in global markets.

[GBP, USD]Sterling is underperforming once again, showing a 0.8% gain versus the euro, which is currently registering as the strongest of the main currencies on the day so far. This has put EUR-GBP at 17-day highs near 0.8500. Cable has posted a one-week low at 1.2870, returning focus on the three-month low seen last week at 1.2849. On the year-to-date, the pound is showing an averaged loss of 1.7% against the dollar, euro and yen.
The publishing of the UK's mandate for negotiating a new trade deal with the EU has been the latest selling catalyst. The document sent an uncompromising message, emphasising that the UK will not sign up to EU rules and regulations, that there will be no extension of the Brexit transition phase beyond the end of 2020, and that preparations to leave the EU's single market and customs union without a new trade deal will commence in June if it is clear that an accord with the Union cannot be reached by then. The EU's mandate for the upcoming negotiations, was softer, saying that the adherence of EU standards would be "a reference point" in negotiations, though given the UK government's stance and limited time frame available, it's hard not to conclude that nothing more than a relatively narrow goods-only trade will be feasible. That means, come January 1st next year, a high proportion of UK trade (including all services) will shift to less favourable WTO terms. Bear in mind that when the UK leaves the Brexit transition period at the end of 2020, it will not just be leaving the EU's single market and customs union, but also participation in the 40 free trade deals the EU has around the world. Replacing these deals with new bilateral agreements will late years.
Another negative for the pound was news, yesterday, that the government is delaying its 2020-21 budget presentation, which increased market expectations that the government is delaying plans for fiscal expansion until later in the year. The BoE had cited among its reasons to refrain from cutting rates in January was the expectation for looser fiscal policy.

[USD, CHF]EUR-CHF has eked out a 10-day high at 1.0639, extending the modest rebound from the five-year-low that was seen on Monday at 1.0590. The pronounced losses the cross has been seeing of late are largely a product of safe-haven demand for the franc. The U.S. last month added Switzerland to its list of currency manipulators. The move seems a bit rich given the franc is a demonstrably chronically-overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index), though the Trump administration argues that Switzerland needs a more expansive fiscal policy.

[USD, CAD]USD-CAD has posted a five-month high at 1.3347 in what is now the sixth up week the pair has seen out of the last eight weeks. Fresh declines in oil prices have driven continued underperformance in the Canadian dollar. Front-month WTI crude prices hit a 14-month low at $47.83, which is the current culmination of a 27%-plus drop from the highs seen in early January. If sustained, this marks a big erosion in Canada's terms of trade, given the importance of crude exports to its economy. The Canadian currency will likely remain subject to near-term volatility and overall underperformance as long as the coronavirus contagion remains in a state of increasing spread. The risk is for further gains in USD-CAD as the spread of the COVID-19 virus doesn't look to have reached a peak, in turn suggesting more economic disruption and less demand for oil.